Professional Documents
Culture Documents
Gonzalez Sy Chiam
GRN 26085; August 12, 1927
1. CONTRACTS; "PACTO DE PETRO;" MORTGAGE.-Held, That the contract
which is copied in full in the decision is a pacto de retro and not a mortgage;
that at the time of its execution and delivery the parties thereto intended to
execute a pacto de retro (a conditional sale) and not a mortgage (a loan);
that the vendor became a tenant of the purchaser and not a mortgagor.
2. ID.; ID.-It has been the uniform rule of this court, due to the severity of a
contract of pacto de retro, to declare the same to be a mortgage and not a
sale whenever the interpretation of such a contract justifies that conclusion.
There must be something, however; in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they
intended the contract to be a mortgage and not a pacto do retro.
3. ID.; EVIDENCE TO VARY TERMS OF.-While it is a general rule that parol
evidence is not admissible for the purpose of varying the terms of a contract,
yet when an issue is squarely presented, that a contract does not express
the intention of the parties, the courts will, when a proper foundation is laid
therefor, hear evidence for the purpose of ascertaining the true intention of
the parties. In every case in which the court has considered a contract to be
a mortgage or a loan instead of a sale with pacto do retro, it has done so,
either because the terms of such contract are ambiguous or because the
circumstances surrounding the execution or the performance of the contract
were incompatible or inconsistent with the theory that said contract was one
of purchase and sale.
4. ID.; WHEN MAY BE REFORMED.-It is a well settled rule of law that courts of
equity will reform a written contract where, owing to mutual mistake, the
language used therein did not fully or accurately express the agreement and
intention of the parties. Relief, however, by way of reformation will not be
granted unless the proof of mutual mistake be of the clearest and-most
satisfactory character.
5. ID.; RENTAL CONTRACTS; USURY-A contract for the lease of property is not
a "loan." Under the Usury Law the defense of usury cannot be based thereon.
The Usury Law in this jurisdiction prohibits a certain rate of interest on
"loans." A contract of "loan" is a very different contract from that of "rent." A
"loan," as that term is used in the statute, signifies the giving of a sum of
money, goods or credit to another, with a promise to repay, but not a
promise to return the same thing. In a contract of "rent" the owner of the
property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. In a contract of rent the
relation between the contractors is that of landlord and tenant. In a contract
of loan of money, goods, chattels or credits, the relation between the parties
of said property.
In accordance with that agreement the defendant paid to the plaintiffs by
means of a check the sum of P16,965.09. The defendant, in addition to said
amount paid by check, delivered to the plaintiffs the sum of P354.91
together with the sum of P180 which the plaintiffs paid to the attorneys for
drafting said contract of pacto de retro, making a 'total paid by the
defendant to the plaintiffs and for the plaintiffs of P17,500 upon the
execution and delivery of said contract. Said contract was dated the 28th
day of November, 1922, and is in the words and figures following:
x x x (in Spanish)
AA examination of said contract of sale with reference to the first question
above, shows clearly that it is a pacto de retro and not a mortgage. There is
no pretension on the part of the appellant that said contract, standing alone,
is a mortgage. The pertinent language of the contract is:
x x x (in Spanish)
Language cannot be clearer. The purpose of the contract is expressed clearly
in said quotation that there can certainly be no doubt as to the purpose of
the plaintiff to sell the property in question, reserving the right only to
repurchase the same. The intention to sell with the right to repurchase.
cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto do retro, that the vendor,
recognizing the absolute sale of the property, entered into a contract with
the purchaser by virtue of which she became the "tenant" of the purchaser.
That contract of rent appears in said quoted document above as follows:
x x x (in Spanish)
From the foregoing, we are driven to the following conclusions: First, that the
contract. of pacto de retro is an absolute sale of the property with the right
to repurchase and not a mortgage; and, second, that by virtue of the said
contract the vendor became the tenant of the purchaser, under the
conditionq mentioned in paragraph 3 of said contract quoted above.
It has been the uniform theory of this court, due to the severity of a contract
of pacto de retro, to declare the same to be a mortgage and not a sale
whenever the interpretation of such a contract justifies that conclusion.
There must be something, however, in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they
intended the contract to be a "mortgage" and not a pacto de retro.
(International Banking Corporation vs. Martinez, 10 Phil., 252; ?adilla vs.
Linsangan, 19 Phil., 65; Cumagun vs. Allingay, 19 Phil., 415; Olino vs.
Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro,
46 Phil., 757; Villa vs. Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not
favored, and that the court will not construe an instrument to be one of sale
with pacto de retro, with the stringent and onerous effect which follows,
unless the terms of the document and the surrounding circumstances require
it. (Manalo vs. Gueco, supra.)
While it is a general rule that parol evidence is not admissible for the
purpose of varying the terms of, a contract, but when an issue is squarely
presented that a contract does not express the intention of the parties,
courts will, when a proper foundation is laid therefor, hear evidence for the
purpose of ascertaining the true intention of the parties. (Manalo vs. Gueco,
supra.)
In the present case the plaintiffs allege in their complaint that the contract in
question is a pacto de retro. They admit that they signed it. They admit that
they sold the property in question with the right to repurchase it. The terms
of the contract quoted above clearly show that the transfer of the land in
question by the plaintiffs to the defendant was a "sale" with pacto de retro,
and the plaintiffs have shown no circumstance whatever which would justify
us in construing said contract to be a more "loan" with guaranty. In every
case in which this court has construed a contract to be a mortgage or a loan
instead of a sale with pacto de retro, it has done so, either because the terms
of such contract are ambiguous or because the circumstances surrounding
the execution or the performance of the contract were incompatible or
inconsistent with the theory that said contract was one of purchase and sale.
(Olino vs. Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico,
34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to
indicate the nature of the conveyance of the land was "pledged" instead of
"sold." In the case of Manlagnit vs. Dy Puico, while the vendor used the terms
"sale and transfer with the right to repurchase," yet in said contract he
described himself as a "debtor," the purchaser as a "creditor" and the
contract as a "mortgage." In the case of Rodriguez vs. Pamintuan and De
Jesus the' person who executed the instrument, purporting on its face to be a
deed of sale of certain parcels of land, had, merely acted under a power of
attorney from the owner of said land, "authorizing him to 'borrow' money in
such amount and upon such terms and conditions as he might deem proper,
and to secure payment of the loan by a mortgage." In the case of Villa vs.
Santiago (38 Phil., 157), although a contract purporting to be a deed of sale
was executed, the supposed vendor remained in possession of the land and
invested the money he had obtained from the supposed vendee in making
improvements thereon, which fact justified the court in holding that the
transaction was a mere loan and not a sale. In the case of Cuyugan vs.
Santos (39 Phil., 970), the purchaser accepted partial payments from the
vendor, and such acceptance of partial payments "is absolutely incompatible
with the idea of irrevocability of the title of ownership of the purchaser at the
expiration of the term stipulated in the original contract for the exercise of
the right of repurchase."
Referring again to the right of the parties to vary the terms of a written
contract, we quote from the dissenting opinion of Chief Justice Cayetano
S..Arellano in the case of Government of the Philippine Islands vs. Philippine
Sugar Estates Development Co. (30 Phil., 27, 38), which case was appealed
to the Supreme Court of the United States and the contention of the Chief
Justice in his dissenting opinion was affirmed and the decision of the
Supreme Court of the Philippine Islands was reversed. (See decision of the
Supreme Court of the United States June 3, 1918.)1 The Chief Justice said in
discussing that question:
"According to article 1282 of the Civil Code, in order to judge of the intention
of the contracting parties, consideration must chiefly be paid to those acts
executed by said parties which are contemporary with and subsequent to the
contract. And according to article 1283, however general the terms of a
contract may be, they must not be. held to include things and cases different
from those with regard to which the interested parties agreed to contract."
The Supreme Court of the Philippine Islands held that parol evidence was
admissible in that case to vary the terms of the contract between the
Government of the Philippine Islands and the Philippine Sugar Estates
Development Co. In the course of the opinion of the Supreme Court of the
United States Mr. Justice Brandeis, speaking for the court, said:
"It is well settled that courts of equity will reform a written contract where,
owing to mutual mistake, the language used therein did not fully or
accurately express the agreement and intention of the parties. The fact that
interpretation or construction of a contract presents a question of law and
that, therefore, the mistake was one Of law is not a bar to granting relief. * *
* This court is always disposed to accept the construction which the highest
court of a territory or possession has placed upon a local statute. But that
disposition may not be yielded to where the lower court has clearly erred.
Here the construction adopted was rested upon a clearly erroneous
assumption as to an established rule of equity. The burden of proof resting
upon the appellant cannot be satisfied by mere preponderance of the
evidence. It is settled that relief by way of reformation will not be granted
unless the proof of mutual mistake be 'of the clearest and most satisfactory
character.' "
The evidence introduced by the appellant in the present case does not meet
and value.
"The opponent maintained, and his theory was accepted by the trial court,
that Berenguer's contract with Laochangco was not one of sale with right of
repurchase, but merely one of loan secured by those properties, and,
consequently, that the ownership of the lands in question could not have
been conveyed to Laochangco, inasmuch as it continued to be held by
Berenguer, as well as their possession, which he had not ceased to enjoy.
"Such a theory is, as argued by the appellants, erroneous. The instrument
executed by Macario Haranguer, the text of which has been transcribed in
this decision, is very clear. Baranguer's heirs may not go counter to the
literal tenor of the obligation, the exact expression of the consent of the
contracting parties contained in the instrument, Exhibit C. Not because the
lands may have continued in possession of the vendor, not because the
latter may have assumed the payment of the taxes on such properties, nor
yet because the same party may have bound himself to substitute by
another any one of the properties which might be destroyed, does the
contract cease to be what it is, as set forth in detail in the public instrument.
The vendor continued in the possession of the lands, not as the owner
thereof as before their sale, but as the lessee which he became after its
consummation, by virtue of a contract executed in his favor by the vendee in
the deed itself, Exhibit C. Right of ownership is not implied by the
circumstance of the lessee's assuming the responsibility of the payment of
the taxes on the property leased, for their payment is not peculiarly
incumbent upon the owner, nor is such right implied by the obligation to
substitute the thing sold for another while in his possession under lease,
since that obligation came from him and he continues under another
character in its possession--a reason why he guarantees its integrity and
obligates himself to return the thing even in a case of force majeure. Such
liability, as a general rule, is foreign to contracts of lease and, if required, is
exorbitant, but possible and lawful, if voluntarily agreed to, and such
agreement does not on this account involve any sign of ownership, nor other
meaning than the will to impose upon oneself scrupulous diligence in the
care of a thing belonging to another.
"The purchase and sale, once consummated, is a contract which by its
nature transfers the ownership and other rights in the thing sold. A pacto de
retro, or sale with right to repurchase, is nothing but a personal right
stipulated between the vendee and the vendor, to the end that the latter
may again acquire the ownership of the thing alienated.
"'It is true, very true indeed, that the sale with right of repurchase is
employed as a method of loan; it is like wise true that in practice many cases
occur where the consummation of a pacto de retro sale means the financial
ruin of a person; it is also, unquestionable that in pacto de retro sales very
important interests often intervene, in the form of the price of the lease of
the thing sold, which is stipulated as an additional covenant.' (Manresa, Civil
Code, p. 274.)
"But in the present case, unlike others heard by this court, there is no proof
that the sale with right of repurchase, made by Berenguer in favor of
Laochangco is rather a mortgage to secure a loan."
We come now to a discussion of the second question presented above, and
that is, stating the same in another form: May a tenant charge his landlord
with a violation of the Usury Law upon the ground that the amount of rent he
pays, based upon the real value of the property, amounts to a usurious rate
of interest? When the vendor of property under a pacto de retro rent& the
property and agrees to pay a rental value for the property during the period
of his right to repurchase, he thereby becomes a "tenant" and in all respects
stands in the same relation with the purchaser as a tenant under any other
contract of lease.
The appellant contends that the rental price paid during the period of the
existence of the right to repurchase, or the sum of P375 per month, based
upon the value of the property, amounted to usury. Usury, generally
speaking, may be defined as contracting for or receiving something in excess
of the amount allowed by law for the loan or forbearance of money-the
taking of more interest for the use of money than the law allows. It seems
that the taking of interest for the loan of money, at least the taking of
excessive interest has ben regarded with abhorrence from the earliest times.
(Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the
people of England, and especially the English Church, entertained the
opinion, then current in Europe, that the taking of any interest for the loan of
money was a detestable vice, hateful to man and contrary to the laws of
God. (3 Coke's Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look
back upon history, we shall, find that there is scarcely any people, ancient or
modern, that have not had usury laws. * * * The Romans, through the greater
part of their history, had the deepest abhorrence of usury. * * * It will be
deemed a little singular, that the same voice against usury should have been
raised in the laws of China, in the Hindu institutes of Menu, in the Koran of
Mahomet, and perhaps, we may say, in the laws of all nations that we know
of, whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is
condemned by the Philippine Legislature (Acts Nos. 2655, 2662 and 2992).
But is it unlawful for the owner of a property to enter into a contract with the
tenant for the payment of a specific amount of rent for the use and
occupation of said property, even though the amount paid as "rent,"' based
upon the value of the property, might exceed the rate of interest allowed by
law? That question has never been decided in this jurisdiction. It is one of
first impression. No cases have been found in this jurisdiction answering that
question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and
declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or
forbearance of any money, goods, chattels or credits, etc. The central idea of
said statute is to prohibit a rate of interest on "loans." A contract of "loan" is
a very different contract from that of "rent". A "loan," as that term is used in
the statute, signifies the giving of a sum of money, goods or credits to
another, with a promise to repay, but not a promise to return the same thing.
To "loan," in general parlance, is to deliver to another for temporary use, on
condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with
a compensation for its use. The word "loan," however, as used in the statute,
has a technical meaning'. It never means the return of the same thing. It
means the return of an equivalent only, but never the same thing loaned. A
"loan" has been properly defined as an advancement of money, goods or
credits upon a contract or stipulation to repay, not to return, the thing loaned
at some future day in accordance with the terms of the contract. Under the
contract of "loan," as used in said statute, the moment the contract is
completed the money, goods or chattels given cease to be the property of
the former owner and becomes the property of the obligor to be used
according to his own will, unless the contract itself expressly provides for a
special or specific use of the same. At all events, the money, goods or
chattels, the moment the contract is executed, cease to be the property of
the former owner and becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract
of "rent" the owner of the property does not lose his ownership. He simply
loses his control over the property rented during the period of the contract.
In a contract of "loan" the thing loaned becomes the property of the obligor.
In a contract of "rent" the thing still remains the property of the lessor. He
simply loses control of the same in a limited way during the period of the
contract of "rent" or lease. In a contract of "rent" the relation between the
contractors is that of landlord and tenant. In a contract of "loan" of money,
goods, chattels or credits, the relation between the parties is that of obligor
and obligee. "Rent" may be defined as the compensation either in money,
provisions, chattels, or labor, received by the owner of the soil from the
occupant thereof. It is defined as the return or compensation for the
possession of some corporeal inheritance, and is a profit issuing out of lands
or tenements, in return for their use. It is that, which is to be paid for the use
of land, whether in money, labor or other thing agreed upon. A contract of
"rent" is a contract by which one of the parties delivers to the other some
nonconsumable thing, in order that the latter may use it during a certain
period and re.turn it to the former; whereas a contract of "loan," as that word
is used in the statute, signifies the delivery of money or other consumable
things upon condition of returning an equivalent amount of the same kind or
quantity, in which cases it is called merely a "loan." In the case of a contract
of "rent," under the civil law, it is called a "commodatum."
From the foregoing it will be seen that there is a wide distinction between a
contract of "loan," as that word is used in the statute, and a contract of
"rent" even though those. words are used in ordinary parlance as
interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount
of rent to be paid for the use and occupation of the property may depend
upon a thousand different conditions; as for example, farm lands of exactly
equal productive capacity and of the same physical value may have a
different rental value, depending upon location, prices of commodities,
proximity to the market, etc. Houses may have a different rental value due to
location, conditions of business, general prosperity or depression,
adaptability to particular purposes, even though they have exactly the same
original cost. A store on the Escolta, in the center of business, constructed
exactly like a store located outside of the business center, will have a much
higher rental value than the other. Two places of business located in different
sections of the city may be constructed exactly on the same architectural
plan and yet one, due to particular location or adaptability to a particular
business which the lessor desires to conduct, 'may have a very much higher
rental value than one not so located and not so well adapted to the particular
business. A very cheap building on the carnival ground may rent for more
money, due to the particular circumstances and surroundings, than a much
more valuable property located elsewhere. It will thus be seen that the rent
to be paid. for the use and occupation of property is not necessarily fixed
upon the value of the property. The amount of rent is fixed, based upon a
thousand different conditions and may or may not have any direct reference
to the value of the property rented. To hold that "usury" can be based upon
the comparative actual rental value and the actual value of the property, is
to subject every landlord to an annoyance not contemplated by the law, and
would create a very great disturbance in every business or rural community.
We cannot bring ourselves to believe that the Legislature contemplated any
such disturbance in the equilibrium of the business of the country.
In the present case the property in question was sold. It was an absolute sale
with the. right only to repurchase. During the period of redemption the
purchaser was the absolute owner of the property. During the period of.
redemption the vendor was not the owner of the property. During the period
of redemption the vendor was a tenant of the purchaser. During the period of
redemption the relation which existed between the vendor and the vendee
was that of landlord and tenant. That relation can only be terminated by a